Five Questions On: CDC pension schemes


Simon Read
Saturday 07 June 2014 00:42

A CDC? Is that a pension scheme for old rockers?

No. It stands for Collective Defined Contribution. That's different to a DC scheme, which stands for Defined Contribution, or a DB scheme, which stands for Defined Benefit.

It all sounds Double Dutch to me. Can't pension people speak in English?

Oddly enough, the government has opened up the retirement market to Dutch-style pensions this week by launching CDC schemes. In short, they allow thousands of people to pay into the same retirement scheme and, in theory at least, share the risk.

Why would we want to do that?

The plans pool savers' investments to create mega-funds. These aim to meet the future pension payouts of scheme members by spreading the investment risk across a variety of opportunities. There's also the hope that they could help cut back on expensive fund management commission charges, leaving more of savers' cash to grow in their pension pot.

They sound great. Where do I sign up?

Hang on, don't be hasty. The schemes have plenty of critics. "They allow one generation of member to receive more pension, in the hope that future investment returns will ultimately justify the decision – but that has significant risks involved," said Alan Higham of Fidelity. Tom McPhail of Hargreaves Lansdown says there used to be collectivised pensions in the UK, but they were called with-profits funds: "Investors now shun these investments because of their complexity, lack of transparency, and poor management," he says.

Ah, so maybe they aren't the answer?

Pensions Minister Steve Webb is a big fan, which is why they were included in this week's Queen Speech. But it's worth bearing in mind what happened in Holland, where the schemes have become unpopular as poor investment returns have led to fewer annual increases and to pension scheme benefits being cut.

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